Author: Bouke Versteegh
Bitcoin Protocol:
- Bitcoin
- Blockchain
- Transactions
- Mining
- Confirmations
- Proof of Work
- [Block reward] (#block-reward)
- Difficulty
- Addresses
- [Base58Check] (#base58check)
- Vanity address
- [Multisignature addresses] (#multisig-address)
- [Encrypted address (BIP0038)] (#bip0038)
- [Stealth address] (#stealth-address)
Bitcoin in Practice:
- Exchanges
- Wallets
- Clients
- Paper wallets
- Cold storage
- Hardware wallets
- Mining Industry
- Mining pools
- Mining hardware
- ASICS
- FPGA
- GPU
- CPU
- QR-codes
Security:
- Double spending
- 51% attack
Computer Terms:
Bitcoin is a digital decentralized currency based on cryptography and mathematics.
Function:
- A global currency and digital payment system which cannot be manipulated or cheated and is not controlled by anyone
Features:
- electronic — use it online, you can back it up, on your phone
- decentralized — not controlled by anyone
- global — usable all over the world
- deflationary — cannot be printed by anyone at will
- irreversible — no-one can reclaim coins they have sent you
- proof of ownership — you can prove to others that you own a certain amount of money
- 100% sound money in accordance with Austrian Economics:
- fungible — every coin is the same
- portable — can easily be sent to anywhere on earth
- durable — bitcoins don't expire
- divisible — bitcoins can be spent in fractions up till 1 millionth
- rare — only 21 million bitcoin will every be created
- uncounterfeitable — mathematically impossible
- desirable — due to it's utility and scarcity, people want them
- unconsumable — bitcoin will never change its role as currency
Not to be confused with blockchain.info.
The blockchain is the core of Bitcoin. It is the public ledger that stores all bitcoin transactions in an independently verifiable way.
- Function:
- Record the entire history of Bitcoin transactions
- Make sure everyone agrees on the transaction history
- Solves the age-old problem of creating consensus without trust
- Features:
- Independently verifiable
- The blockchain contains:
- Genesis Block — The first block in the blockchain
- All blocks after it
Blocks in the blockchain group multiple transactions together. Each block points back to the previous block, forming a long chain until the first block (Genesis block). Blocks serve as checkpoints in the transaction-history that everyone agrees on. If there are multiple competing blocks the chain will split, and whichever chain becomes longer will win.
Function:
- Store valid transactions
- Creating new bitcoins
- Checkpoints
Features:
- a block contains:
- multiple transactions — usually a few hundred
- a nonce — a meaningless random number
- a reference to a previous block
- a hash of the above
- the difficulty for the next block
- Each block rewards the issuer with some number of Bitcoins, depending on the blockheight
- Block Size
Mechanism:
- To be accepted by the network, the block must be valid.
- To be valid:
- the referred previous block must also be valid
- all transactions in the block must be valid
- the hash must match the transactions/nonce/reference data
- the hash must start with enough zeros, determined by the difficulty
Transactions are instructions to the Bitcoin-network to send bitcoins to other addresses, similar to checks in traditional banking. Transactions are issued by the sender, and verified by miners. Transactions are not final until they are confirmed by the Bitcoin-network.
Function:
- Moving bitcoins from one address to another
- Modifying the public ledger
Features:
- a transaction contains:
- a transaction-id
- one or more inputs — which bitcoins to use
- zero or more outputs — which addresses to send the bitcoins to
- transactions are created by bitcoin clients
- clients relay transactions to eachother and to miners
Mechanism:
- The input amounts are added up
- The total output amount cannot exceed the total input amount
- If the total output is less than the input, the miner will receive the remainder as a fee
A transaction contains one or more inputs that describe which bitcoins to spend. An input is a reference to the output of a previous transaction. This way, every spent bitcoin is accounted for and can be traced back to its origin.
Function:
- Allow every amount of bitcoin to be traced back to its generation
- Make every transaction independently verifiable
Mechanism:
- An input consists of:
- A transaction id — refers from which transaction the coins came
- An index — specifies a single output within that transaction
- An input always spents all bitcoin from the previous output
- To only use part of the input, return addresses are used
transaction outputs are part of a transaction and describe to whom bitcoins will be transfered, and how many. The amounts can be tiny fractions of bitcoins.
Function:
- Specify who can spend a certain amount of bitcoin.
Features:
- It consists of:
- an amount of bitcoin — expressed in satoshis
- an output script or a script hash
- Mininum output amount is 1 satoshi
- The transaction "destination" is not necessarily a bitcoin address. Arbitrary spending rules can be created, such as "anyone can spend" or "he who provides a number that hashes to f489w34fwo5fh can spend".
Mechanism:
- The script programmatically defines the rules of who can spend the bitcoins from this output.
- The script typically requires that the spender proves ownership of an address (the recipient's bitcoin address).
- Instead of a script, the hash of a script can be used to specify spending rules. In this case, the recipient has to provide the script when they spend this output.
One hundred-millionth of a bitcoin (1/100,000,000 or 0.00000001). The smallest unit of Bitcoin.
The sender of bitcoins may include a miner fee in their transaction. Miners are free to choose which transactions to include in their blocks, and fees encourage them to include a transaction. Because including a transaction doesn't cost anything, fees can be very low. However, the blocksize limits the number of transactions that can be included in a block, so large transactions (in terms of Kilobytes) usually require a bigger fee.
Function:
- Encourage miners to include a transaction in a block
- Limit transaction spamming
- Create a market for processing transactions
Mechanism:
- If the input-total of a transaction exceeds the output-total, the remainder is rewarded to the miner.
Bitcoin-software often shows the confirmation status of a transaction. An unconfirmed transaction means that it wasn't yet recorded in the blockchain. The first confirmation happens when a miner includes the transaction in a block and publishes the block and the proof of work to the network. The second confirmation is when another block is added to the blockchain, etcetera.
In computer science and mathematics, a proof of work (POW) is a solution to a difficult problem that is easily and independently verifiable. Blocks require a proof of work to be accepted by the network. This limits the rate at which blocks can be created. Through difficulty, the average creation rate is maintained at 10 minutes, regardless of the available processing power in the network.
A block must contain a hash of the data in the block and a random nonce-value, and this hash must begin with many zeros. The hash cannot be controlled directly, but by trying out many different nonce-values, a nonce that generates a valid hash can be found. The proof of work is the nonce in combination with the rest of the block.
Function:
- Making sure blocks are added to the chain at regular intervals
- By extension, controlling Bitcoin inflation
- Randomizing who will get new bitcoins
- Creating a delay between blocks, so they have time to spread through the network before the next one is found, and making sure everyone is up-to-date
Features:
- Hashing a block+nonce can be done very fast
- Anyone can hash the block and its nonce, to verify that the hash is valid
- The number of zero's to be found is controlled by the difficulty
Mechanism:
- A block's hash depends on the transactions and nonce
- The nonce can be chosen by the miner
- The block is re-hashed with random nonces, until it generates a hash with enough
0000's.
An address is where you send bitcoins, similar to how you use an email-address to send emails to.
A bitcoin address looks like:
1LBmhMXR28xWJeQoZBU53w9EsFKnbn6Nqq
and can also be shown as a QR-code.
Function:
- Distinguish between different accounts that can hold a bitcoin balance
- Establish ownership of bitcoin balances
Features:
- Generated by Bitcoin clients
- No central authority is needed to create an address
- Can be created offline
- Creating addresses is instant and free
- There is no limit to how many addresses you can own
- Contains error-checking mechanism, can't type it wrong
The chance of typing a wrong but valid address by accident is:
1 in 232, that is, approximately 1 in 4.29 billion - Generated by public-key cryptography
- The owner can mathematically proof to have created that address
- Cannot be counterfeited (takes millions of years to counterfeit an address)
- It is 27-34 characters long and sensitive to capital letters
- It is possible to find an address with words in them. This is called a vanity address.
Mechanism:
-
Generation:
- The wallet generates a private key, and remembers it.
- From the private key, the public key is derived.
- The public key is hashed, and an error checking code is appended
- This is then encoded in Base58Check and becomes the address.
-
Encoding:
- It starts with a
1or a3 - It contains numbers, letters and capital letters
- It includes only distinguishable characters, so
l/i,0/Oare excluded. - It is encoded using Base58Check
- It starts with a
In computer science, a nonce is a meaningless number. It is often added to data to make sure it's unpredictable or unique. In Bitcoin, nonces are used in:
- Blocks
- Signatures(?)
Function
- Maintain a fixed block creation rate, regardless of increases in computer speed or network size
- (todo)
In computer science, a hash is a string of characters that is uniquely derived from a piece of data. The same input always leads to the same hash, but it is impossible to calculate the input data from the hash.
Example data and their hashes:
This is a piece of text! — 34f79yw587w94r7q0243ry057yrw935fw5hk
This is a piece of text. — fodjxc98syfxeos4ifs3847rt9q34arfleuh
In computer science, an index is a number that identifies an item in an ordered list. In computer system, items are counted from 0 instead of from 1.
In this example, index 0 refers to Bread, and 2 refers to Eggs.
- Bread
- Butter
- Eggs
- Cheese